Skip to main content

REITs Myths

Real estate investment trust (REIT) was first introduced in the US in 1960, creating opportunities for retail investors to invest in big-ticket commercial real estate assets which is otherwise typically inconceivable. Netherlands (1969) and Australia (1971) soon followed suit. Over twenty countries have adopted the REIT structure since then, including developing nations like Malaysia, Mexico, South Africa and UAE. Recently, SEBI introduced the REIT structure for India. Indian REIT ('IREIT' hereafter) borrows its fundamental structure from international markets but has its own unique features. Despite a relatively rich history of global REITs, IREITs will be young undertakings lacking their indigenous knowledge system. While it will take us a little while to put IREITs in real-world perspective and learn from experience, here are some myths (and the myth busters) to help build our fundamental understanding of IREITs
 
Myth 1: Investing in REIT is same as investing in direct real estate Reality:
 
While a few countries require a REIT to go public, units of IREITs must be publicly traded securities like common equity. Yet, they will derive their value from the underlying real estate assets that the trust holds and manages which are rather illiquid. Internationally conducted empirical research offers mixed evidence regarding how the performance across the two (REIT stocks and underlying real estate assets) are correlated. Recently, REIT returns (large-caps in particular) have shown stronger correlation with real estate markets in the long run. However, the association changes over market cycles. Knowledgeable REIT managers enjoy specialized knowledge of the asset segment and build strong economies of scale, thus offering more value of management expertise which is often superior to direct real estate holding. Yet, the benefits are not directly (or immediately) translated to the REIT units (as would be the case with direct real estate holdings) since the exchange-traded units are subject to stock market sentiments as well.
 
 Myth 2: Investing in REIT is same as investing in small-cap stocks Reality:
 
REIT investment is fundamentally different from common stocks. Regulation mandates a REIT to distribute most of its taxable income (90% for an IREIT) to unitholders. In return, the distributed capital will be tax-exempt. To avoid the entity-level tax, REITs tend to distribute more than 100% of taxable income to investors. This mitigates double-taxation and avoids expensive tax-avoidance strategies that most corporations usually have to adopt. Traditionally, REITs were considered to be 'dividend-machines'. However, since a REIT unitholder benchmarks its units with other corporations, a REIT is constantly under pressure to grow. As the retained earnings are limited, they often reach out to public to raise funds, thus raising the cost of capital. Yet, research suggests a positive net effect on the market capitalization caused by these REIT specificities.
 
Myth 3: All mutual fund managers may also manage REITs Reality:
 
Although mutual fund managers may find it relatively easier to adapt to the unique nature of REIT management, a REIT is a substantially different animal. IREIT regulation does not distinguish between two distinct management activities that other countries are specific about:
(1) property management and
 (2) advisory.
 
The property management activity refers to property-level operations and requires property-class specific skills. The advisory activity is related to investment management (acquisition/disposition of assets). In contrast to mutual funds, an REIT manager can influence the unit performance solely by optimizing the property management functions without significantly reallocating the assets. In fact, regulations restrict frequent asset dispositions which is often a requirement for portfolio reallocation strategies for cash-strapped firms such as REITs. The global REIT market shows a tendency to employ in-house advisors and are open to outsourcing property management to third parties. The IREIT mandate requires advisors to be external parties as well. Research suggests that although external advisory is perceived to be diluting control, it benefits when the property portfolio is geographically diversified. Local investment managers are more efficient in negotiating with local stakeholders such as lenders and regulators.
 
 Myth 4: All real estate company managers may also manage REITs Reality:
 
IREIT is substantially different from the conventional real estate companies (RECs) in India. Most RECs are primarily focused on residential sector. IREITs cannot develop residential assets and are restricted to commercial assets. Besides, RECs mostly specialize in assets that are developed to be sold whereas an IREIT must hold 80% real estate assets which are 'rent generating'. Besides, 75% of the revenues must come from real estate operations. Short term capital gains are indirectly penalized. Beyond these considerations, an REIT manager must also be watchful of the interplay between NAV and unit prices. Executing suitable strategies (e.g. raising capital through secondary equity offerings when units are relatively over-priced and through selling properties when NAV is overvalued) is a skill that requires deep understanding of the 'Main Street' (properties market) as much as of the 'Dalal Street' (stock market).
 
Myth 5: All commercial real estate asset holdings can adopt REIT status Reality:
 
Technically, all income generating assets qualify as suitable real estate assets for IREIT. However, the regulation is not yet clear about some asset classes. Take hotels, amusement parks, cinemas owners, for example. While a large part of income from running such facilities could be attributed to real estate; not all of it is real estate income. A hotel guest, for example, buys a package of services beyond leasing a real estate asset for a night. Operators of such assets may find it challenging to divide such revenues into real estate versus non-real estate category.
 
As the regulation stands now, one possible solution seems to be outsourcing the non-real estate activities to a third party who will lease the real estate asset for business from the owners. 

 

Popular posts from this blog

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Feeder funds are the cheapest way to invest in gold

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   There are four ways to put your money in gold — buying physical gold/jewellery , putting money in gold exchange-traded funds ( ETFs ), investing in a gold savings fund and going for the National Spot Exchange's e-gold. Now, some gold ETFs and e-gold even allow taking physical delivery of gold at the end of investment tenure. That might sound good if you wish to possess physical gold. But, given the firm price of gold today (almost ~31,000 per 10g), it is important that gold is bought through acost-effective avenue. Reason: Investing comes at a price. Add to that, India's gold buying is expected to decline in 2012 and 2013, according to the latest World Gold Council ( WGC )report. WGC Director Vipin Sharma feels gold imports may drop to 800 tonnes from 967 tonnes last year. And the mix between the jeweller...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

Mutual Fund Review: Reliance Regular Savings Balanced

Reliance Regular Savings Balanced fund has shown great resilience during market crash After a shaky start, this fund has established itself as a strong contender in this space. In the past three years it has ridden the market well by not only delivering during the market run-ups but also displaying resilience during the crash. In 2008, it witnessed the second lowest fall among its category and last year it was amongst the top three performers with a return of 76 per cent (category average: 61%).   The poor underperformance in 2006 can well be credited to the low equity allocation of the fund, which stood at just over 10 per cent for only four months that year. Though the fund has the leeway to go up to 75 per cent in equity, it has never touched that limit. In fact, it has exceeded 70 per cent in just five months in its entire history. During the crash of 2008, the fund managers had no problem going right down to 54 per cent (equity exposure). Fund managers Omprakash Kukian and A...

Tax Returns: Myths and facts of filing your Tax Returns

THE fiscal year has ended and many choose to make tax-filling. Despite this being a regular, annual ritual, several tax payers have some misconceptions, some of which are listed below: Misconception No. 1 Filing tax returns is a complex and cumbersome process. I need a Chartered Accountant to help me file my tax returns. Contrary to popular belief, preparing and filing tax returns is actually quite simple. If you have a digital signature you can accomplish the entire process sitting at home on your computer thanks to the e-filing facility on www.incometaxindiaefiling.gov.in. Alternatively, you can submit the returns online, print a one-page receipt, sign it and drop it off at the income tax office within fifteen days of submitting the returns. No documents are required to be submitted with the receipt. However, if you want help, there are several third party service providers who offer tax preparation and filing services for a fee as low as Rs 200. Misconception No. 2 The interest I p...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now